Tightening Credit? Why? Regulators Will Force A Recession Yet!

Much has been written on the credit crisis caused by lax lending standards of the mortgage industry.

In short, loans were made to millions of borrowers, based upon inadequate credit standards. Or perhaps not.

Perhaps the loans were made based upon "overselling" borrowers adjustable rate loans, that gave borrowers payments right up the limit of their ability to pay. Lenders know that ARM's are dangerous, and know it is a risk. The reason they make ARM's is to pass the interest rate fluctuation risk on to borrowers. Thousands of conversations like: "If you buy an ARM we will give you a lower rate" took place, with the lenders understanding the risk much better than borrowers. Lenders knew they were putting a burden of potential disaster on borrowers. They did it out of greed.

So, when the major lenders such as Bank of America, Citibank, Wells Fargo, Country Wide, and thousands of smaller mortgage companies now experience losses, they should be forced to "bite the bullet" and recognize that aggressive greed played a big part in the crisis. Perhaps just as bad, are the major financial institutions of the USA who then packaged these loans, and sold them without full and complete disclosure of the risks involved to banking "friends" in Switzerland, Germany, France and throughout the global banking industry. Some European banks have reported losses in the hundreds of millions because of loans purchased from U.S. banks. With friends like these institutions, who would need enemies?

Now the good bankers, those who did not abuse the system will again rise to the surface, and the market will help identify bankers of integrity and professional character.

RECORD FORCLOSURES

Last week we saw record home foreclosures in places such as Chicago, Dallas, Los Angelos, Phoenix, Orlando. The very cities that grew so fast and with so much power are now the places to look for bargains.

OUR PREDICTION: There is always opportunity in failue and transition. We predict this will be true in this case as well. This problem will continue, as foreclosures increase for the next 12 to 24 months. Banks will gradually get more and more non performing assets.

What will banks do next?

Banks and mortgage companies across America will first put these into "problem loan" files, then begin to accrue for losses every month.

But with time the examiners will make them charge the loans down, by at least 40% to 60% Regulators will then require bankers to put these bad loans into REO accounts. Then it is actually charged to bank earnings as a loss, as well as the cost to earnings of the accruals. When the banks get a larger and larger pool of REO's the examiners will begin to put more pressure on them to liquidate the pool of "non performing assets in the REO account".

Then, the banks will be willing to take discounts to rid themselves of these problem assets, which have become liabilities.

PRACTICAL STEPS FOR OPPORTUNITY: We have spoken to investors who will become buyers for these foreclosed properties. We are planning to create an investment group to pursue this, and offer no more than 60% of appraised value (before repairs). Investors doing this will have a good opportunity to reap stable long term profits on their investments, and eventually profit as the housing market stablilizes again. In the meantime, those of use who make such investments will create a pool of stable rental and income producing properties, that can upon recovery of the markets (3 to 6 years), be resold into the market to worthy borrowers at good investment profits.

Problems if understood, can create opportunity.